M/S BRAHMA STEYR TRACTORS LTD.,CHANDIGARH vs. ITO, W-1(2), CHANDIGARH

आदेश/ORDER

Per Annapurna Gupta, Accountant Member: The above appeal has been preferred by the assessee against the order of the Commissioner of Income Tax (Appeals)-I, Chandigarh [(in short referred to as ‘(CIT(A)’] dated 24.1.2019 relating to assessment year 2014-15, confirming the levy of penalty u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’.

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terms of the following grounds:

“1. That the Learned Commissioner of Income Tax (Appeals) has erred in sustaining penalty U/s 271(1)(c) of the Income Tax Act, 1961 for furnishing of inaccurate particulars of income. The appellant had not furnished any inaccurate particulars of income as the liability appearing in the books of account of the appellant company was squared off by the respective parties in their books of account. The same does not tantamount to furnishing of any inaccurate particulars of income on the part of the appellant. In view of the above stated facts and circumstances, it is prayed that the penalty order may kindly be quashed.” 3. During the course of hearing before us the Ld.Counsel

for the assessee took us through the facts of the case as

find mention at para 4 of the order of the Ld.CIT(A) in terms

of reproduction of the penalty order passed by the Assessing

Officer. Referring to the same, Ld.Counsel for the assessee

pointed out that penalty in the present case had been

imposed on addition made during the assessment

proceedings u/s 41(1) of the Act, of outstanding credit

balance in the accounts of two parties, holding that the

same had ceased to exist. It was pointed out that the two

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parties whose outstanding credit balance had been so

treated as income of the assessee were the following:

1) Air Agro Pvt. Ltd. = Rs.11,64,889/- 2) Indian Steel Wire Product Limited = Rs.19,49,263/- 4. It was pointed out that the assessment order so passed

had not been challenged by the assessee and in this

backdrop and considering the submissions made by the

assessee during penalty proceedings the AO had, after

rejecting the contention of the assessee finding the plea to

be unacceptable, levied the penalty on the impugned

additions @ 100% of the tax sought to be evaded on the

same, amounting to Rs.9,62,276/-. It was pointed out that

the same was confirmed by the CIT(A) also.

assessee stated that though the addition made had not been

challenged in appeal, the addition in any case was not

sustainable in law and, therefore, there was no case for levy

of penalty u/s 271(1)(c) of the Act on account of the

assessee having furnished any inaccurate particulars of

income or having concealed any particulars of income. It

was stated that the addition had been wrongly made under

the provisions of section 41(1) of the Act and the penalty

proceedings being distinct and separate from assessment

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proceedings, the assessee was well within its rights to

challenge the addition so made in the proceedings. The

Ld.Counsel for the assessee stated that section 41(1) of the

Act brings to tax any amount earlier claimed as allowance or

deduction by the assessee on account of which any benefit

subsequently accrues to the assessee by way of remission or

cessation of liability arising from the same. The Ld.Counsel

for the assessee stated that the essential condition,

therefore, for applying section 41(1) of the Act is that any

liability outstanding in the books of the assessee represents

any allowance or expense claimed by the assessee in earlier

years. The Ld.Counsel for the assessee stated that this was

not the fact in the present case since both the liabilities

outstanding were in relation to the amounts advanced by the

said concern for setting up of the business of the assessee

and not for carrying out any business. It was pointed out

that in fact the assessee company had been operationally

inactive since inception and lying dormant with no

commercial activities and had therefore never claimed any

expense or allowance. Our attention was drawn to the

submissions made to the CIT(A) in this regard, reproduced

at para 4.1 of the CIT(A)’s order as under:

"The Company M/s Brahma Steyer Tractors Ltd. was established in the year 1993 to -set up a Plant for manufacture of tractors. However, the company was

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unable to set up the plant and therefore never came into business and did not have any trading transactions, as there was no operational income or expenditure. The company is operationally inactive since its inception and now lying dormant with no commercial activities. Certain expenses were incurred by M/s Air Agro Private Limited and The Indian Steel & Wire Products Limited erstwhile sister concerns, at the time of setting of business in behalf of the Company. Hence the amount lying to their credit were shown as liability towards them and these liabilities are in no way trading liability as the company never came into operation. The Assessing Officer during the course of Assessment Proceedings sought information u/s 133(6) of the Income Tax Act, 1961 regarding outstanding balance by M/s Air Agro Private Limited and The Indian Steel & Wire Products Limited. M/s Air Agro Private Limited confirmed having no business dealing with the appellant. M/s Indian Steel & Wire Products Limited was in BIFR. It is submitted that the amount in question was not trading liabilities. The respective companies had incurred certain expenses on behalf of the appellant company which was shown as payable to them by the appellant. The respective parties had squared off the amount due to them much earlier in the respective books. The same does not tantamount to furnishing of inaccurate particulars by any stretch of imagination.” 6. Further the Ld.Counsel for the assessee contended that

on eof the creditors The Indian Steel & Wire Products Limited.,

ISWPL, had become sick and had gone to BIFR and

thereafter squared off the amounts much earlier in its books

of account. That the other, M/s Air Agro Pvt. Ltd. had been

taken over by M/s Blue Coast Infrastructure Development

Ltd. in 2008 and subsequently its name had been changed

to Joy Hotel & Resorts Pvt. Ltd. It was contended by the

Ld.Counsel for the assessee that when the AO had made

enquiry with the said company u/s 133(6) of the Act, it had

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been stated that the present entity had no dealing with the

assessee company, which meant that they were not

undertaking any business transaction with the assessee

company which was a fact on record. Ld.Counsel for the

assessee contended that the same had been incorrectly

interpreted by the Revenue as meaning denial of existence

of any amount outstanding for payment to the said party.

The Ld.Counsel for the assessee contended that both these

companies had on their own squared off the amount in their

books of account much earlier but the assessee was unaware

of the same and continued reflecting the same as

outstanding in its books of account. The Ld.Counsel for the

assessee, therefore, contended that the amounts

outstanding not being in the nature of trading liability and

the said creditors having suo motto written off their claim, it

could not be said that there was any cessation or remission

of any liability u/s 41(1) of the Act so as to treat the same

as benefit accruing to the assessee in the impugned year

and liable to tax as per the provisions of the said section.

The Ld.Counsel for the assessee, therefore, contended that

on merits it could not be said that the assessee had

concealed or furnished any inaccurate particulars of income

so as to attract the levy of penalty u/s 271(1)(c) of the Act.

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the CIT(A) and stated that it was abundantly clear that the

liability of these two parties had ceased to exist and the

assessee having not written off the liability and brought the

same to tax as per the provisions of section 41(1) of the Act,

had clearly concealed/furnished inaccurate particulars of

income. The Ld. DR relied upon the findings of the

Ld.CIT(A) at paras 4.5 of the order as under:

4.5 In the present case, the assessee Company M/s Brahma Steyer Tractors Ltd. was established in the year 1993 to set up a Plant for manufacturing of tractors, but that plant could not be set up and resultantly the company's business never came into being. There were no trading transactions either. Besides this, natural corollary was that there was no operational income or expenditure. Meaning thereby that the assessee company is operationally inactive since its inception and lying dormant with no commercial activities. The AR has submitted that certain expenses were incurred by M/s Air Agro Private Limited and the Indian Steel & Wire Products Limited erstwhile sister concerns, at the time of setting of business on behalf of the Company. The amount lying to their credit were shown as liability towards them and these liabilities are in no way trading liability as the company never came into operation. The AO during the course of Assessment Proceedings sought information u/s 133(6) of the Act regarding outstanding balance by M/s Air Agro Private Limited and the Indian Steel & Wire Products Limited. M/s Air Agro Private Limited confirmed having no business dealing with the appellant. M/s Indian Steel &Wire Products Limited was in BIFR. AR concluded in his arguments that the amount in question was not trading liabilities. The respective companies had incurred certain expenses on behalf of the appellant company which were shown as payable to them by the appellant.

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These two respective parties had squared off the amount due to them much earlier in the respective books. The same does not tantamount to furnishing of inaccurate particulars by any stretch of imagination. On perusal of penalty order, and the submissions of the AR, it is clear that these transactions were reflecting in the books of accounts. This is also an undisputed fact that M/s Indian Steel & Wire Products Limited was in BIFR. The other company i.e. M/s Air Agro Private Limited now M/s Joy Hotel & Resorts Pvt. Ltd. confirmed having no business dealing with the appellant in response to notice u/s 133(6) of the Act. It is also an undisputed fact that the amount owed to M/s Air Agro Pvt. Ltd., remained unclaimed as there was change in the management of the said company and the present entity M/s Joy Hotel & Resorts Pvt. Ltd., has not raised any claim of the amount due to Air Agro Pvt. Ltd. It is in these facts and circumstances; the AO has held that there is cessation of liability. M/s Air Agro Private Limited now M/s Joy Hotel & Resorts Pvt. Ltd. confirmed having no business dealing with the appellant. It has squared up the said claimed "long term liability" by the assessee on its own. No effort has been made by M/s Air Agro Private Limited now M/s Joy Hotel & Resorts Pvt. Ltd. to recover this amount. Similarly, M/s Indian Steel & Wire Products Limited was in BIFR but it has also not made any effort to claim the said amount from the assessee when it was in dire need of funds. The act of both the creditors vis-a-vis the assessee clearly establishes that there is mutual understanding for cessation of the said liabilities. This cessation of liability was never shown as income by the assesee, where as the assessee loudly submits that both the said companies had squared off the amount due to them much earlier in the respective books. AO has rightly considered it as cessation of liabilities u/s 41(1) of the Act and this act of AO has been accepted by the assessee when it has not filed appeal against the assessment order. It is in these fact and circumstances the AO has held that the appellant has furnished inaccurate particulars of income. The AO has established beyond doubt that the intention of the assessee was of mutual cessation of the above liabilities with the creditors. The case laws relied by the AR do not help the case of the assessee in the light above facts of the assessee. Hence, penalty imposed by the AO is confirmed. The Ground of Appeal is dismissed.”

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perused the orders of the authorities below. The issue before

us relates to levy of penalty on the addition made in

assessment, to the income of the assessee, u/s 41(1) of the

Act, being liabilities relating to two creditors ,ceasing to

exist. It is an admitted fact that the assessee has not

challenged the said addition before the appellate

authorities.

assessee that the penalty proceedings are distinct and

separate from assessment proceedings and the assessee can

justifiably challenge the legality of the addition made in

penalty proceedings.

before us is that no penalty is leviable since the addition is

not sustainable in law, as the provisions of section 41(1) of

the Act do not apply to the facts of the present case. The

Revenue, on the other hand, has opposed this contention of

the Ld.Counsel for the assessee.

the assessee. We find that the assessee has made out a

justifiable case against the sustainability of the addition

itself. We have gone through the provisions of section 41(1)

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of the Act, under which addition was made in the present

case and penalty levied thereon. The said section is

reproduced hereunder:

“Profits chargeable to tax. 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first- mentioned person) and subsequently during any previous year,- (a) the first- mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first- mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income tax as the income of that previous year. ” 11. As is evident from a bare reading of the section and as

rightly pointed out by the Ld.Counsel for the assessee,

cessation of only those liabilities which represent expenses,

allowances or losses claimed in assessment earlier by the

assessee are treated as profits and gains of business.

Further the section treats such liabilities as incomes of the

year in which the liability ceases to exist.

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of the section are not fulfilled. The Ld.CIT(A) himself has

recorded a finding of fact at para 4.5 of his order ,

reproduced above, that the impugned liabilities do not

represent any trading liability since the assessee had never

commenced business and had therefore never incurred any

operational expense or earned any income. The Ld.CIT(A)

has gone on to mention the assesses explanation that these

liabilities represented advances given by the two creditors

for setting up business of the assessee, but has not

controverted the same nor found any falsity in the same.

Therefore even as per the Ld.CIT(A) the liabilities did not

represent any expense, allowance or loss claimed earlier by

the assessee. Further we find that that there is nothing on

record to show that the liabilities ceased to exist in the

impugned year. In fact we find the assessee had contended

that the parties had written off the amounts in earlier years.

And on the basis of this admission of the assessee the

Revenue derived that the liabilities ceased to exist, but

there is no finding, when. The entire case of the Ld.CIT(A)

for treating the same as income u/s 41(1) of the Act, rests

on the fact that the amounts represent liabilities and the

facts demonstrate that they cease to exist. But this is not

sufficient to treat the amount as profits and gains of

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business for the year as required by section 41(1), as pointed out above by us.

Sd/- Sd/- �दवा �संह अ�नपूणा� गु�ता (ANNAPURNA GUPTA) (DIVA SINGH) �याय�क सद�य/Judicial Member लेखा सद�य/Accountant Member �दनांक /Dated: 27th September, 2019 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar